E & Y Says Transfer Pricing Deals Tax Double Whammy

An overwhelming majority of multinational companies are exposed to the risk of being taxed twice on the same profits because of transfer pricing issues, according to a recent survey conducted by professional services firm Ernst & Young (E&Y).

Although most multinational companies agree that transfer pricing is the most important issue related to taxation, they "are losing out on opportunities arising from proactive transfer pricing management of post-merger integrations, e-commerce and intellectual property", warns John Hobster, chief executive officer of global transfer pricing services of Ernst & Young.

"Half of all companies that reported a merger or acquisition in the last two years simply applied the dominant company's transfer pricing methodology, and 23 per cent allowed multiple systems to continue. This increases their risk of being taxed on the same profits twice, and falls short of "best of class" behaviour to harness the opportunities presented by such event," Hobster said.

The transfer pricing 2001 global survey: making informed decisions in uncertain times? covers practices, perceptions and trends in 22 countries. It is the fifth major Ernst & Young survey on transfer pricing practices of leading multinational companies.

The survey polled international tax directors in a total of 638 parent company, and 167 subsidiary company interviews were conducted.

The E&Y survey ranks transfer pricing as the most important current international tax issue. This also matches the trend reported in a similar survey exclusive to India where 56.6 per cent respondents ranked transfer pricing as the most important international tax issue. As part of the Union Budget 2001, the Indian government has notified guidelines for transfer pricing.

Transfer pricing involves the price at which transactions between units of multinational companies take place, including the inter-company transfer of goods, property, services, loans and leases.

Rajesh Dhume, national director for E&Y India's tax consulting and compliance services, said: "From the perspective of all multinationals, transfer pricing is an extremely important international tax issue. Multinationals make a clear connection between double taxation and transfer pricing. Getting the transfer pricing strategy wrong substantially increases the threat of double taxation."

The new E&Y survey found that only 29 percent of corporate parents consider transfer pricing as part of their strategic corporate planning. "Failing to integrate transfer pricing policies in the case of mergers and acquisitions is alarmingly common," notes Hobster.

Even as e-commerce transactions across borders continue to rise, two-thirds of parent companies and half of subsidiaries surveyed by E&Y do not consider transfer pricing issues related to their e-commerce activities, and only one-fourth of parent companies expect the impact of e-commerce to become significant to transfer pricing planning.

"Less than 30 percent of companies consider the transfer pricing-related issues around e-commerce, despite the fact that in many industries, the development of e-commerce is a major value enhancer," said Hobster.

The survey also found that there was no widespread clear and coherent adoption of intellectual property management strategies. "Simply 'managing' a company's intellectual property does not equate to responsible planning," said Bob Ackerman, co-director of E&Y's Americas transfer pricing practice.

"Failure to integrate business and tax strategies in the intellectual property arena leads to poor operating outcomes and overpayment of tax," he said.